A recent published decision by the U.S. Bankruptcy Appellate Panel of the Ninth Circuit (the BAP) in the matter of Cruz v. Stein Strauss Trust #1361, PDQ Investments, LLC, 2014 WL 4258990 (9th Cir. BAP 2014), indicates that the protections of the automatic stay may apply to property of the debtor pursuant to Bankruptcy Code Section 362(a)(5), even if that property is not property of the bankruptcy estate. [11 U.S.C. § 362(a)(5)]. The Cruz decision appears to carve out an exception to the view that the protections of the automatic stay do not extend to property that is not property of the estate. [Atighi v. DLJ Mortgage Capital, Inc., 2011 WL 3303454 (9th Cir. BAP 2011)].

Section 541 of the Bankruptcy Code defines property of the bankruptcy estate to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” [11 U.S.C. § 541(a)(1) (emphasis added)]. Thus, in contrast to Chapter 12 and 13 cases where sections 1207 and 1306 expand the definition of property of the estate to include property acquired post-petition, a debtor’s post-petition acquisition of property in a Chapter 7 or 11 case is not property of the estate [11 U.S.C. §§ 1207, 1306]. However, as the BAP indicates in Cruz, this does not mean that the property is not subject to the protections of the automatic stay.

In Cruz, the wife of the original borrower of a loan securing real property executed a grant deed whereby she purported to transfer a fractionalized interest in the property to the debtor, Guido Cruz, several weeks after he filed a skeletal Chapter 7 bankruptcy petition. Three hours after the purported transfer, the property was sold to a third-party purchaser at a trustee’s sale. The bankruptcy court reasoned that because the property was acquired post-petition, it was not property of the estate and, therefore, not subject to the protections of the automatic stay. While the BAP agreed that the property was not property of the estate, it stated that the property was arguably property of the debtor and, thus, still protected by the automatic stay under 11 U.S.C. Section 362(a)(5).

Cruz reaffirms the necessity for creditors to file motions for relief from the automatic stay in cases where there is a post-petition transfer of property to a debtor. Creditors should also seek retroactive annulment of the automatic stay where there is a stay violation, regardless of whether or not the property is property of the bankruptcy estate. To the extent that there is any question regarding the applicability of the automatic stay, legal counsel should be consulted for a more detailed analysis and recommendation to avoid liability for automatic stay violations.